People have often commented that they could never afford enough insurance. While most people believe insurance can never be enough, there is a particular type of insurance which you can consider using to lower the cost of getting enough insurance cover.
A decreasing term insurance.
What is a decreasing term insurance? (You can read about the types of insurance here.)
For a simple illustration, take for example Peter, a 30 year old with 2 young children, David (boy, aged 3) and Jess (girl, age 0), with wife, Nancy, a home maker. In this example, Peter is the sole-bread winner.
If Peter were to be diagnosed with critical illness or disability or pre-matured death, it is likely that the financial situation of all the four persons in his family will be in jeopardy.
We use simple calculations to determine how much insurance Peter needed, assuming his family spends $2,500 a month.
If we assume the age for David to be independent (after tertiary education and National Service) he would be 25 years old. For Jess, it would be age 22 (after tertiary education).
In this case, Peter would need insurance coverage to replace his earning capacity for 22 years. (I.E until David and Jess are financially independent to take care of themselves and subsequently their mother).
For simplicity, we would not take into account of inflation. Thus Peter would need, $2,500 x 12 x 20 years = $600,000.
If we were to factor inflation, the amount needed would be about $830,000.
The graph below shows the estimated yearly expenses for Peter with inflation adjusted at 3% p.a.
The graph below shows the total expenses his family would need for a period of 22 years, followed by 21 years and so on.
If one were to buy a 22 years level term insurance that covers death, disability and critical illness, it would probably cost about $204 per month.
If you were to buy a decreasing term insurance (5% run down), it will cost, $104. Almost half the price of a level term. (At year 22, the coverage would have been reduced to about $60,000). Most decreasing term insurance payment ceased about 2-3 years before the coverage expired. So on year 20, Peter would most likely not be paying any more premiums.
So, if you think you could not afford to give your family a sense of security, think again.
I would advise most people to mix some whole life to give them total protection for life (the chance of getting critical illness increases as one grows older), level term insurance and some decreasing term insurance to have a well-balanced insurance portfolio.
If you are budget tight, you can still provide enough cover for your family if you mix some decreasing term insurance into your insurance portfolio.
For those who wanted to find out more, contact me today.
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I have 11 years experience in the financial planning industry. I have created this website for my clients to learn more about financial planning.